PIMCO likesthe look of China stocks

PIMCO, manager of the world’s largest mutual fund, is buying Chinese stocks after hiring a former Goldman Sachs fund manager to lead its drive into developing-nation equities.

The PIMCO EqS Emerging Markets portfolio that opened yesterday had a “large overweight in China", where financial and property stocks were attractive, said Maria Gordon, who was hired last year to manage the fund. PIMCO also had a “favourable view of the yuan", she said.

Credit Suisse Group increased its 12-month forecast for the Hang Seng China Enterprises Index, HSBC increased its rating on China to “overweight" and Macquarie Group said investors should lift holdings after a fourth interest rate increase in six months was announced on April 5. Premier Wen Jiabao’s government is seeking to curb the fastest inflation since 2008 without derailing growth.

“We look for companies that may have been affected by cyclical adversity, where the earnings story is likely to be better once the story is normalised," Ms Gordon said.

The Hang Seng China Enterprises Index (a gauge of 40 Chinese companies listed in Hong Kong known as the H-share index) has dropped 0.7 per cent since the People’s Bank of China began raising interest rates in October, trailing a 7.8 per cent gain in the MSCI Emerging Markets Index. When China’s borrowing costs increased a similar amount from October 2004 through March 2007, the index jumped 113 per cent.

California-based PIMCO, which oversees $US1.2 trillion in assets, began diversifying beyond US bonds after predicting two years ago that developing nations would play a bigger role in the global economy. Co-founded by
Bill Gross
four decades ago, it manages about $US200 billion in emerging- market debt.

The price-earnings ratio of the Hang Seng China Enterprises Index is 23 per cent below its five-year average after profits surged 32 per cent last year, beating analysts’ estimates, Bloomberg data shows.

“This is the space wherein companies trade at a significant discount to their net asset values," Ms Gordon said. “We’ve seen 18 months of macro-prudential measures under way. We’ve also seen the reflection of those worries in the equity market."

The Hong Kong-traded shares of Chinese banks “still have about 10 per cent upside potential from the current valuations in the near term", after outperforming the market by 8 to 9 per cent since mid-February, analysts said in the report.

The yuan has strengthened 0.9 per cent versus the US dollar this year, after a 3.5 per cent rise in 2010.

Emerging-market nations had “very significant structural growth opportunities" and “strong trend earnings growth" in comparison with developed-market peers over three to five years, Ms Gordon said. “Bubble and risk have faded partly because of the worries about the mid-cycle rebalancing," she said.